The Strategic Evolution of Aer Lingus from a Full Service Airline to a Low Cost Carrier and Finally Positioning Itself Into a Value Hybrid Airline
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The Strategic evolution of Aer Lingus from a Full Service Airline to a Low Cost Carrier and finally positioning itself into a Value Hybrid Airline. Aer Lingus has been a unique airline as it transitioned from a full service airline to a low cost carrier and is currently positioned as a Value Hybrid. It has co-existed with Ryanair for decades and faced numerous macroeconomic events that had a cascading effect on its commercial enterprise. Its transformation into a Value Hybrid in 2010 showcased its differenciation against Ryanair as it produced value-adding and consumer driven product differentiation beyond the basics of the low cost carrier product. The research aims to uncover the various strategies that were applied to structurally re-engineer the carrier. Analytical insights accompanied by the views of leading industry experts uncovered the key pillars underpinning Aer Lingus’ turnaround which precipitated a subsequent buyout from IAG. These strategies included: strict adherence to capacity displine; relentless cost control and value-adding product differenciation; innovative partnerships including contract flying; and most importantly, the re-engineering of its Dublin based hub airport. A visionary masterplan for the hub was fabricated to capitalise on Ireland’s geographical positioning which targeted the traffic flows between UK/European and North American destinations through its synchronised connection network at Dublin. Keywords: Aer Lingus, Hybrid, Dublin hub, North Atlantic Aer Lingus’ 80 year history has been in a constant state of flux tethering on the brink of bankruptcy in 1993, 2001 and 2009. Its airline business model was encapsulated as a Full Service Network Carrier till 2002, evolving thereafter into a Low Cost Carrier as it cohabitates with Europe’s lowest unit cost provider (Ryanair) until 2008, after which, it began adapting its business model towards that of a Hybrid1 airline where it adopted certain fundamental LCC principles while retaining the core elements of network airline. Figure 1 summarises the cyclical financial turbulence endured by Aer Lingus from 1980 to 2014, a period through which it encountered the most challenges as deregulation triggered a new competitive era in an ever challenging macroeconomic environment. Since its inception up to 2014, it had ammassed an overall net loss of €78 million after 80 years in operation. Yet it became International Airlines Group’s (IAG) strategically most important newest member in 2015 and a carrier highly valued by IAG, particarly since it began developing its hub as a mechanism to transfer traffic from UK and EU airports to North America (Walsh, 2015). This paper aims to uncover the principle strategies that were applied to structurally re-engineer Aer Lingus to overcome its numerous challenges over the decades and to disclose the key underpinning strategies of its Value Hybrid business enterprise that made it such an attractive aquisition proposition for an IAG buyout. Insert Figure 1 Background of Aer Lingus Aer Lingus: Its inception to 2001 – A Full Service Network Carrier Aer Lingus was established in 1936 as Ireland’s national airline. For decades, Ireland had one of the most stagnant aviation markets in Europe and it was perceived as an unattractive destination for new entrants. Agriculture remained the bedrock of employment and economic development; while data from the Irish Central Statistics Office (2015) reported that unemployment levels reached 17% in the 1980s while a 68% marginal tax rate prompted mass emigration to the US and to the UK. In addition, Ireland’s tourism potential was suppressed by the continuing violence in Northern Ireland2, as the country as a whole was perceived to be in conflict. Tourism overall to Ireland, had been stagnant at 2 million visitors a year for two decades. Academics, classified the Irish flag carrier with all the symptoms and characteristics of ‘Distressed State Airline Syndrome’, an acronym linked with inefficiencies and bureaucracy stemming from State ownership (Doganis, 2001 and Barrett, 2006). The Irish incumbent suffered from an array of complications including: loss making (32 loss making years from 1936 – 2014); strong unions (SIPTU, IMPACT and TEEU), which represent approximately 97% of Aer Lingus employees; overstaffing with 6,000 staff to carry 2.0 million passengers in 1977/78 (Barrett, 2006) – with no change over the next decade; bureaucratic management (Skinner and Cranitch, 1990); no clear development strategy (developed 40 non airline businesses (Share, 1986); poor service quality (high fares bundled with standard service, Barrett, 2006)); together with constant government interference such as enforcing a compulsory Shannon airport stopover which prevented direct transatlantic flights to and from Dublin. In 1986, Ireland became the first European country to allow a new market entrant to compete with its national airline on its major route, 11 years before EU deregulation in 1997. This new challenger became known as Ryanair, which would forever change the dynamics of Aer Lingus and the EU short haul market. Barrett (1997) declared that Ryanair immediately offered fares more than 50% below the tariff of that charged by the Irish incumbent, while O’Connell and Williams (2005) calculated that Aer Lingus’ unit costs (in terms of CASK) were double that of Ryanair, making it very difficult for the flag carrier to compete. By the early 1990s, the Irish incumbent faced a dual challenge because Ryanair continued to encroach on its markets and due to the first Gulf War, which plunged Aer Lingus into a deep financial crisis, whereby it lost IR£116 million in 1993 and had debts accumulating IR£540 million, while transporting just 6.6 million passengers - this was worse than all other European airlines, with the exception of Olympic, while Swiss and Sabena had already declared bankruptcy. In an effort to restructure the losses, a rescue proposal termed the Cahill plan was inaugurated to reduce the workforce and restructure the business, while the Government injected IR£175m (£90m for redundancy payments with the balance used to reduce debt) – under new EU laws, this was the last time that Aer Lingus would receive any further subsidies. Wallace et al (2006) indicated that Industrial relation issues with the unions over redundancies were essential to this package as it endorsed that staff attrition of 1,500 employees accompanied the bailout, while the Government discredited the Aer Lingus board for their irresponsible management that incited its impending difficulties (House of the Oireachtas, 1993). This package saved Aer Lingus. Over the following years, Aer Lingus capitalised on growth levels in the industry due the ongoing strong worldwide economic prosperity, while its earlier cost cutting measures were also contributing positively to its financials as it generated close to €120 million in net profit from 1995 – 2000. Aer Lingus: From 2001 to 2009 – A Low Cost Carrier The global macro effects of the early 2000s spurred a series of catastrophic events that had a cascading effect on Aer Lingus. Principle among the factors that had precipitated the airline’s early decline were scares over the Foot and Mouth disease in the UK and Ireland, which led to a major drop in traffic in one of its most important markets as UK traffic accounted for 3.6 million of the 6.9 million total traffic carried in 2000. Meanwhile, its profitable North American operation was plunged into disarray as the technology stock crash in 2000, coupled with the 9/11 attacks, pushed the carrier deeper into financial crisis. The sudden fall in US traffic had disastrous consequences for Aer Lingus, which earned around 40% of its revenues and 50% of its profits from its North American operations (Aer Lingus, 2002). Meanwhile, over half of Aer Lingus’ short-haul routes were now in direct competition with low cost carriers out of its Dublin hub airport, in contrast to Lufthansa where only 12% of its European routes were in direct competition with budget carriers at Frankfurt Main (O’Connell, 2007). With the North Atlantic market in chaos and continued pressure from Ryanair, the airline lost €140 million in 2001 and its financial situation was rapidly deteriorating. O’Connell and Williams (2005) reported that it was losing €2.5 million per day by November 2001. Willie Walsh took the helm of Aer Lingus in October 2001. The new management team realised that the low-cost sector had created a radical and irreversible downward shift in ticket prices. It needed to vigorously remove more cost layers and adopt as many low-cost features as possible while retaining some essential differentiators such as primary airports and connectivity for example, in order to differentiate itself more effectively from Ryanair. Walsh etched out a survival plan which required cost reductions to the magnitude of €344 million, spanning from 2001 to 2003, which represented 30% of the 2001 cost base which were required in order to restructure the airline and mount a formidable challenge to Ryanair. In tandem, it implemented six core strategies that underpinned Aer Lingus’ turnaround that included: a fare reduction of 37.5% on short haul routes coupled with a 25% reduction for the long haul; strengthened the network footprint togther with standardising to a single fleet type; realigned the human resource threshold while enhancing productivity; expediated its distribution mechanism to an online platform, retained the Aer Lingus’ differentiated products; together with effective advertising (O’Connell, 2007). These policies transformed the carrier’s finances from a loss of €139 million in 2001 to a profit of €69 million by 2003. Mannion succeeded Walsh as CEO in mid 2005 whose principle mission was to prepare and float the national carrier on the stock market3. The proceeds from the sale of the new shares were intended to be used to finance the airline’s fleet expansion, as well as a once-off contribution to its pension fund4.